Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.
Introduction to Accounting        and FinanceWeek 1:   Who does what – Accounting vs. Finance   Setting the stage – Comm...
Who does what        Accounting vs. FinanceAccounting:    “Captures the financial value of the day to day   activities of ...
Who does what       Accounting vs. FinanceFinance: “Uses accounting information to guide and fund the   growth of an organ...
Who does what               Accounting basicsAccounting:   Transparent       Information is reliable and credible throug...
Who does what            Finance basicsFinance:  Focus is on:          Economic value versus book value     Opportunity ...
Setting the Stage          Common Legal EntitiesSole proprietorship   One owner – taxes from profits are paid on owners  ...
Setting the Stage          Common Business Forms Characteristic         Proprietorship        Partnership         Corporat...
Setting the Stage        Common Business TypesService   Provides a value added activity   Labor intensiveManufacturing  ...
Setting the Stage             Common Business TypesUnique issues for Accounting and Finance        Unique Issues          ...
Communicating the Business   3 Critical Financial StatementsBalance Sheet:   Represents a snap shot in time of the invest...
Communicating the Business            The Balance Sheet  The Balance sheet must have the following                 equalit...
Communicating the Business      The Balance Sheet - Assets Assets measures the amount of resources the firm can utilize to...
Communicating the Business  The Balance Sheet - Liabilities    Liabilities measures the amount of services or benefits the...
Communicating the Business     The Balance Sheet – Equity Shareholder Equity measures the amount of value that investors  ...
The Balance Sheet – Digital Media                                                                                  Prior Y...
Communicating the Business          Income Statement The Income statement must have the  following equality        Profit...
Income Statement                                                             Prior Year   Current Year                    ...
Communicating the Business Income vs. Cash Flow Statement Profit and cash are separate concepts Income statement does no...
Communicating the Business              The Cash Flow Statement Shows the amount of cash generated from the firm’s operat...
Cash Flow Statement                             Current Year  Cash Flow from Operations   Net Income                      ...
Overview of Week 2 Generally Accepted Accounting Principles Double Entry Accounting Using journal entries to prepare  ...
Upcoming SlideShare
Loading in …5
×

Week 1 business entities & financial statements

601 views

Published on

Published in: Business, Economy & Finance
  • Be the first to comment

  • Be the first to like this

Week 1 business entities & financial statements

  1. 1. Introduction to Accounting and FinanceWeek 1:  Who does what – Accounting vs. Finance  Setting the stage – Common Business Entities  Communicating Value – The Financial Statements
  2. 2. Who does what Accounting vs. FinanceAccounting: “Captures the financial value of the day to day activities of an organization through the application of specific accounting rules. It allows these activities to be reported in a way that is transparent, relevant, and comparable to investors, creditors and management”
  3. 3. Who does what Accounting vs. FinanceFinance: “Uses accounting information to guide and fund the growth of an organization, evaluate new business opportunities, and establish the economic value of a firm. In essence maximize shareholder value”
  4. 4. Who does what Accounting basicsAccounting: Transparent  Information is reliable and credible through the application of standard rules. Relevant  Internal & external users can make decisions from information that is material. Comparable  Financial value can be benchmarked through structured financial statements.
  5. 5. Who does what Finance basicsFinance: Focus is on:  Economic value versus book value  Opportunity cost versus actual cost  Forecast versus current state
  6. 6. Setting the Stage Common Legal EntitiesSole proprietorship  One owner – taxes from profits are paid on owners personal tax rate (eliminates double taxation) however owner is responsible for all debt.Partnership  Same as sole proprietorship but with multiple owners.Corporation  Many owners who are not personally responsible to pay the debt of an organization (limited liability) but are doubled taxed.
  7. 7. Setting the Stage Common Business Forms Characteristic Proprietorship Partnership CorporationOwners One Mulitple ManyLimited Liability No ** No ** YesUnlimited Life No No YesDouble Taxation No No Yes** Proprietorships and Partnerships that are set up as LLCs (limitied liabilitycorporations) provide limited liability
  8. 8. Setting the Stage Common Business TypesService  Provides a value added activity  Labor intensiveManufacturing  Converts raw material into a product  Capital intensiveMerchandising  Purchases product in bulk at major discounts and resells  Inventory intensive
  9. 9. Setting the Stage Common Business TypesUnique issues for Accounting and Finance Unique Issues Service Manufacturing MerchandiseLabor Intensive High Low Low - MediumPrice sensitivity to raw materials No Extremely Sensitive SensitiveInventory Obsolescence No Concern Depends on Product Big ConcernCapital Intensive Low High Medium to HighScalability Hard Easy EasyProfit Margins High Medium Thin
  10. 10. Communicating the Business 3 Critical Financial StatementsBalance Sheet:  Represents a snap shot in time of the investments of a firm or it’s assets and the financing of a firm or it’s liabilities and shareholder equityIncome Statement:  Measures the ability of the firm to generate profit in a given period of time (monthly, quarterly or annual) from it’s operational activitiesCash Flow Statement:  Shows the amount of cash generated or used from the firm’s operating, investing and financing activities during a period of time
  11. 11. Communicating the Business The Balance Sheet The Balance sheet must have the following equality: Assets = Liabilities + Equity Resources needed Loans needed to Investments needed to produce revenue buy assets to buy assets
  12. 12. Communicating the Business The Balance Sheet - Assets Assets measures the amount of resources the firm can utilize to generate profit through its operational activities Cash Cash Equipment Equipment Short Long Accounts Accounts Resources Resources Land Land Receivable Receivable owned or owned or controlled by a controlled by a company company Buildings Inventory Inventory Buildings Notes Notes Intangible Intangible Receivable Receivable
  13. 13. Communicating the Business The Balance Sheet - Liabilities Liabilities measures the amount of services or benefits the company receives from other firms or creditors in exchange for a promise of payment Accounts Accounts Notes Notes Payable Payable Payable Payable Creditors’ claims Creditors’ claims on assets on assets Taxes Taxes Wages Wages Payable Payable Payable Payable
  14. 14. Communicating the Business The Balance Sheet – Equity Shareholder Equity measures the amount of value that investors can claim after liabilities to creditors are subtracted from the firm’s assets Owner’s Owner’s Claims on Claims on Equity = Assets - Liabilities Assets Assets
  15. 15. The Balance Sheet – Digital Media Prior Year Current Year Assets Current Assets Operational Cash 400,000 650,000 Activities Accounts Receivables 650,000 550,000 Inventory 420,000 525,000 Total Current Assets $ 1,470,000 $ 1,725,000 Non-Current Fixed Assets Plant/Equipment 700,000 750,000 Investing Activities Accumulated depreciation (100,000) (150,000) Building/Land (net of depreciation) 850,000 750,000 Total Non-Current Assets $ 1,450,000 $ 1,350,000 Total Assets $ 2,920,000 $ 3,075,000 Liabilities and Shareholders Equity Current Liabilities Accounts Payable 645,000 570,000 CreditorsFinancing Activities Non-Current Liabilities Bonds Payable 1,562,500 1,462,500 Total Liabilities 2,207,500 2,032,500 Shareholders Equity Investors Common Stock 250,000 400,000 Retained Earnings 462,500 642,500 Total Shareholders Equity 712,500 1,042,500 Total Liabilities and S.H. Equity 2,920,000 3,075,000
  16. 16. Communicating the Business Income Statement The Income statement must have the following equality Profit = Revenue – Expense
  17. 17. Income Statement Prior Year Current Year Revenue Sale of Digital Equipment 2,592,500 3,050,000 Operational Activities Consulting Services 1,147,500 1,350,000 Total Revenue 3,740,000 $ 4,400,000 Expenses Cost of Goods Sold 2,363,085 2,745,000 Salary & Wages 985,000 1,150,000 General Administration 76,201 123,714 Total Operating Expense 3,424,286 4,018,714 Operating Income (EBITDA) 315,714 381,286 Other Expenses Interest Expense 120,000 112,200Activities Depreciation on Fixed Assets 25,000 50,000 Other Taxes 32,014 39,086 Total Other Expenses 177,014 $ 201,286 Net Income 138,700 $ 180,000
  18. 18. Communicating the Business Income vs. Cash Flow Statement Profit and cash are separate concepts Income statement does not account for other sources of cash generated outside of it’s operations. Income statement includes non-cash expenses which distorts how cash is generated.
  19. 19. Communicating the Business The Cash Flow Statement Shows the amount of cash generated from the firm’s operating, investing and financing activities during a period of time. The cash flow statement follows this model: Cash received from sales Cash paid for operating Cash flow from Operations of goods and services - expenses = operations + or - Cash received from sell Cash paid for acquisition Investing of investments and PPE - of investments and PPE = Cash flow from Investing + or - Cash paid for dividends Cash received from issue Financing of debt or equity - & repayment of debt or = Cash flow from Investing equity = Net change in cash flow for the period
  20. 20. Cash Flow Statement Current Year Cash Flow from Operations Net Income 180,000 Additions: Depreciation Expense (Not related to Cash) 50,000 Decrease in Accounts Receivable 100,000 Subtractions: Increase in Inventory (105,000) Decrease in Accounts Payable (75,000) Total Cash Flow from Operations 150,000 Cash Flow from Investing Activities Investment in Plant and Equipment (50,000) Disposition of Real Estate 100,000 Total Cash Flow from Investing Activies 50,000 Cash Flow from Financing Activities Pay down of Long Term Debt (100,000) Cash from issuing Common Stock 150,000 Total Cash from Financing Activities 50,000 Total Change in Cash Account 250,000
  21. 21. Overview of Week 2 Generally Accepted Accounting Principles Double Entry Accounting Using journal entries to prepare  Balance Sheet  Income Statement  Cash flow statement

×